How Much Do I Need to Retire in Canada

Posted on October 19, 2021

The idea of retirement at a young age is the primary goal of many people. It's an achievement to work through middle age, manage your money, and wind up on the other end with enough savings to live comfortably without having to work. 

It's tricky to do if you don't have cushy company benefits or a well-paying job, though. That doesn't mean it's not possible. 

Hopefully, the information below can give you some guideposts on how to start thinking about early retirement in Canada in a practical way. Let's get started:

Understanding Early Retirement

55 is the optimal age to retire for those who can do so. The typical age of retirement is somewhere around 65 years old but it's entirely possible to build your savings up to a point where you can get out ten years earlier, especially if you start saving up while you're young.

When it comes to specific dollar amounts you'll need to retire, you aren't going to find any objective ones. Some people desire to live on far less than others, and it's possible to get by minimally if you need to. 

That said, most of us want to continue living at our current level of comfort as we enter retirement. Let's say, for the sake of this article, that you're looking to live on $40,000 per year as you go through retirement. 

You can adjust the numbers to fit your desires, but the formula will remain largely the same for any amount of money. Additionally, it's important to note that there are numerous ways that you can save and generate money through retirement. 

Most of those options involve investing and generating interest. The particular dollar amount you need to save will depend on your current savings portfolio, where your money is held, and how much interest it accumulates. 

It's important to be careful when you're planning for retirement, though, as holding massive amounts of savings in risky portfolios isn't wise. 

So, let's take a look at your safest bets for retirement savings. 

CPP and Retiring Early

You should never forget that you might be eligible to receive the Canada Pension Plan (CPP) when you retire. That income should factor into your estimates of how much you plan to save as well. 

The tricky thing about receiving CPP is that you need to be at least 60 years old to start receiving those benefits. So the earliest age you can receive CPP benefits is 60, and you'll receive slightly less money when you take on those benefits. 

The longer you postpone CPP payments after turning 60, the higher they will be; although there's no benefit in postponing any longer after you turn 70, as payments will no longer increase. You also must have made at least one valid contribution to the CPP.

What Is FIRE Retirement?

FIRE stands for Financial Independence Retire Early and is a method of saving a great deal of money early on in order to retire whenever you'd like to. Some people who use FIRE retire early in their 30s and 40s if they were particularly diligent. 

This retirement plan requires that you take out around half of your income and put it into savings to generate a sum that will provide for you through interest as you age.  

The 4 percent rule suggests that your savings can support you indefinitely if you continue to take only 4 percent out every year.  

How Much Do I Need to Retire at 55: FIRE Method

A safe way to ensure that you're taken care of is to plan to withdraw 4 percent of your savings each year. Ideally, that figure will be sitting in a savings account that generates more than 4 percent interest each year as well. 

So, you'll still be accumulating more wealth as you go through retirement, and you can hypothetically take more and more out each year, relative to the amount of money you gain in interest. 

This is a way to live off of a small portion of your savings, offering up a massive safety net in the event of an emergency, and continuously renewing the money you spend throughout the year. 

In order to live at your current standard of living and only pull 4 percent of your savings each year, you'll need to save 25 times your annual income by the time you turn 55. 

In the case of a person who wants to live off of $40,000 per year, that means amassing $1,000,000 dollars by that time.

how much money do i need to retire

How Am I Supposed to Save One Million Dollars or More?

A million dollars might seem like an incredible sum that would be impossible for you to achieve on your salary. The truth is that the older you get before you start saving and investing that money, the more difficult it becomes to retire early. 

The key is to plan out your investment portfolio as early as possible and aim for the mark you'll need to hit to retire at the age you'd like to. That could require you to divert larger portions of your income towards investing if you're starting at a later age.

Let's say, for example, that you start your portfolio at the age of 20, and you find that interest generates at a steady 7% annual average. If you're making $40,000 per year and dedicate 20% of your income to savings over 35 years, you would end up with roughly $1,150,000 by the time you're 55. 

Saving and diverting that much of your income consistently is a difficult task, sure, but consider the fact that it will set you up extremely well for retirement. 

That situation doesn't account for raises that the person might get over time and other financial benefits that their work could provide. 

If that person's income didn't change from $40,000 over 35 years, though, it would feel as though they made $32,000 considering the amount they'd be putting into savings. 

Thinking of That Sacrifice

It might seem like a difficult thing to try and save a significant portion of your money and put it away for retirement. 

The thing is, though, that the money you save will continuously generate more interest throughout the span of your life. If your interest rate continues to grow at the hypothetical 7 percent annually, the 4 percent you withdraw will allow you to continuously grow your wealth with the remaining 3 percent. 

That remaining three percent of $1,000,000 dollars would mean that you've accrued an additional $30,000 dollars for that year. That's far more than the initial $8,000 dollars per year that you were contributing. 

So, while it might be an inconvenience to tuck away 20 percent of your income every year, you're actually winding up with far more money than you would ever otherwise have if you didn't invest it. 

Over the course of the 30-plus years that you'll be in retirement, you might rack up a figure pushing over three or four million dollars if you keep living on the established $40,000 per year. 

Want to Learn More About Financial Well Being?

Retiring early truly depends on how much you want to live off per year. It's a complicated process to save that much money, but it's absolutely possible if you have early retirement in mind. 

Along with your retirement plan, no matter what age, life, travel and health insurance should be a priority as well.  We are one of the country's top financial comparison platforms and take pride in sourcing the best possible quotes from all of the major insurance companies across Canada.  Get a quote today!

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